A man walks past an electronic stock board showing Japan’s Nikkei 225 index at a securities firm in Tokyo Tuesday, Feb. 25, 2020. Shares are mostly lower in Asia on Tuesday after Wall Street suffered its worst session in two years, with the Dow Jones Industrial Average slumping more than 1,000 points on fears that a viral outbreak that began in China will weaken the world economy.(AP Photo/Eugene Hoshiko)

With cases of the coronavirus outside China rising, questions swirl about the global economic implications of the killer outbreak.

One high-profile example was seen Monday. Stock indexes suffered one of their worst days in years, with Wall Street’s venerable Dow Jones index tanking more than 1,000 points at one point of the trading day.

“What was largely a Chinese issue to resolve has soon become an international problem, with European eyes transfixed on Italian efforts to curb the spread of the virus,” said Joshua Mahony, senior market analyst at IG. “Fears over a potential coronavirus contagion throughout Europe is likely to provide substantial risk-off sentiment for days and weeks to come, with significant pressure on the Italians to stop this outbreak from spreading throughout the continent.”

Policymakers, central bankers, economists and investors are all struggling to assess the economic damage from an outbreak that’s reached 37 countries and territories, infected 80,000 people and killed 2,700 worldwide.

China, the epicenter of the outbreak, faces the most acute near-term difficulties as factories lie idle and people remain homebound. But the ripple effects are being felt all around the world, as China is both a major importer of goods as well as a source of parts through intricate supply chains.

The global economy was just stabilizing after wobbles caused by the trade war between the U.S. and China and fears of a disorderly British exit from the European Union. The coronavirus hit just as a U.S.-China preliminary deal and a Brexit withdrawal divorce agreement had boosted hopes for a modest upswing, particularly in Europe.

Talk of a global recession, or at least a serious slowdown in business growth, is now common. The world economy could see its first quarterly fall in business output since the global financial crisis of more than a decade ago.

No clear precedent

Health experts don’t know where or how fast the virus will spread.

Economic experts can’t draw on clear precedents to consider what to do.

The tools they normally use to fight economic slumps — interest-rate cuts, government spending hikes and tax relief — either might not work very well, lack broad support or carry their own risks.

If they overreact, policymakers can cause self-defeating panic. Yet if they respond too slowly or timidly, they risk having the economic damage deepen and spread.

“This outbreak will have a significant effect on worldwide demand for tourism, travel, and other services, while the supply chain disruptions and increased uncertainty will hurt current production as well as investment,” said Eswar Prasad, a Cornell University economist. “The timing of the outbreak is especially unfortunate … Europe and Japan are flirting with recession while China and India had been losing growth momentum.’

Mark Zandi, chief economist at Moody’s Analytics, suggested that the European Central Bank has little ability to counteract a recession. It has cut its benchmark rate into negative territory, to minus-0.5%, and is already buying government bonds to try to further lower longer-term rates.

“What is the policy response in Europe?” Zandi asked. “There is none.”

With so many other economies overseas struggling, the U.S. would likely suffer a hit just from the overseas slowdown, he said.

Catherine Mann, chief economist at Citi, said the financial services giant has cut its forecast for global economic growth this year to 2.5%, the weakest pace since the Great Recession.

Changing their tune

When the virus began grabbing headlines last month, most economists were relatively sanguine about the economic damage it could cause.

Experts predicted a repeat of what happened when the SARS outbreak hit China and its neighbors in 2003: A short-lived blow to economic output, followed by a relatively quick rebound.

But the virus has proved virulent and fast-moving. No one expected the virus to slam countries as far-flung as Italy and South Korea. And the quarantines and lock-downs that governments have imposed to try to stop the outbreak have brought business to a standstill in hard-hit places such as Chinese industrial hub of Wuhan, a city of 11 million where COVID-19 originated.

What happens in China carries far greater economic weight than it did 17 years ago. Back then, China accounted for just 4% of the global economy. Now, it’s 16%. And its factories and warehouses are deeply integrated with the rest of the world, supplying toys, shoes, cellphones to importers around the world.

“This is unprecedented,’ said Sung Won Sohn, an economist at Loyola Marymount University in California. “That’s one of the reasons we cannot really say this will be another SARS.’

In response, governments can inject money into public works projects or approve sharp tax cuts. The Federal Reserve and other central banks can slash interest rates. Given enough of a financial incentive to borrow and spend, consumers eventually will open their wallets. And companies will hire, buy equipment and open new factories, offices and shops.

So revving up demand is something policymakers are used to. But this time, they don’t have a go-to remedy for the kind of supply shock that the coronavirus is causing — the lockdown of factories in China and elsewhere that is cutting off the flow of raw materials and finished products to customers around the globe.

Health, economy collide

The virus and the health measures that are meant to combat it are depressing consumer demand. Families quarantined in Wuhan and elsewhere tend to “stay at home and cut back on discretionary spending for eating, recreation and travel,’ said economist Paul Sheard, senior fellow at Harvard Kennedy School.

Earlier this week, Beijing pledged to enact tax cuts and other aid to help companies recover from the crisis. Chinese officials expressed confidence that economic growth can meet the Communist Party’s targets despite anti-virus policies that have shut down much of the world’s No. 2 economy.

Elsewhere, policymakers face difficult decisions.

“A big looming shock calls for an early and aggressive policy response, but such a response could turn out to be unnecessary and look panicky,’ Sheard said. On the other hand, if COVID-19 continues to inflict damage, “policymakers who take an inordinate wait-and-see approach will look to have been heavy-footed and complacent in retrospect.’

So far, the Fed has chosen to monitor the health crisis and its economic fallout and hold off on any decision to cut rates below their already low levels. Its cautious approach is beginning to draw criticism from some.

“They need to be proactive,’ said Loyola Marymount’s Sohn.

Fed’s challenge

Fed officials have made clear that they are monitoring the virus but do not have a clear handle on its current or potential impact.

“I’m really a data wonk — I’ll look at anything that moves,” Richard Clarida, vice chair of the Federal Reserve, said Tuesday at an economics conference. But he said it’s “still too soon to even speculate about either the size or the persistence” of the coronavirus’ effects.

Loretta Mester, president of the Federal Reserve Bank of Cleveland, said this week that the Fed will keep in close touch with its business contacts to see how the disease affects their sales and outlooks. That may be where policymakers will see the first signs of an impact.

The Fed reduced rates three times last year, leaving its benchmark rate in a low range of 1.5% to 1.75%. There’s little more room to cut. Likewise, the government has already enacted tax cuts and spending increases that have put the nation on track to record its first $1 trillion budget deficit in eight years.

“There really isn’t much we can do in terms of fiscal policy,” Sohn said. “Our deficits are so high, and it takes time for Congress to act. I’m not expecting much from the administration.’

Larry Kudlow, President Donald Trump’s top economic adviser, however, promised Tuesday that “we will be ready with a number of measures, emergency measures, common sense measures” if the virus’ “contagion rate picks up.”

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